What’s the difference between a fixed interest rate loan and a variable interest rate loan? How do I know what type I have?
Interest is the amount you’re charged for borrowing money. When you pay back a loan, you pay it back with interest. How much interest you pay back depends in part on your loan’s interest rate.
- Fixed interest rates stay the same for the life of the loan.
- Variable interest rates may go up or down due to an increase or decrease in the loan’s index, which is a publicly available benchmark reflecting general economic conditions the lender uses to calculate the interest rate.
Both your rate and rate type can be found on your billing statement and loan documents.
How is the interest rate on my variable rate loan calculated?
For a variable rate loan, most lenders start with a benchmark index and add a margin. For instance, if the lender uses the London Interbank Offered Rate (LIBOR) as its index and then adds a 5% margin, the rate will be quoted as “LIBOR + 5%.” While economic conditions may make the benchmark index go up or down, the margin added will usually remain the same.
You can find your loan’s benchmark index and margin on your promissory note and loan documents.
What is LIBOR?
LIBOR is a benchmark index that has been used by many lenders, including Sallie Mae, to calculate the interest rate for variable rate loans for many years but is now being phased out worldwide and will no longer be a representative benchmark after June 30, 2023.
What is SOFR?
The Secured Overnight Financing Rate (SOFR) has been identified and recommended by banking regulators and industry groups to replace LIBOR. As a result, SOFR is the benchmark index that many U.S. banks and financial institutions, including Sallie Mae, will use to replace LIBOR for consumer loans.
How will my fixed rate loan be affected by the transition from LIBOR to SOFR?
Fixed rate Sallie Mae loans won’t be affected by the transition.
How will my variable rate loan be affected by the transition from LIBOR to SOFR and will it affect how much I owe/pay on my loan?
If you have a variable rate Sallie Mae loan with a LIBOR index, in July 2023, the index will change from 1-month LIBOR to a type of SOFR known as spread-adjusted, 1-month CME Term SOFR. We selected this replacement index based on recommendations and guidance from banking regulators and industry groups. In developing this index, these regulators and industry groups have taken steps intended to make the transition away from LIBOR as seamless as possible with the goal of minimizing any changes to borrowers’ monthly payments resulting from the transition.
For more information, you can check out this FAQs document, published by the Alternative Reference Rates Committee, an advisory group convened by the Federal Reserve Board and the Federal Reserve Bank of New York.